In a time when the major U.S. stock market indices are in turmoil and there’s no sign that 2019 will bring any relief whatsoever, having a crisis hedge in your portfolio isn’t a luxury – it’s a necessity. All signs indicate trouble ahead in the equities markets, and the time to prepare yourself is now, not when the economic reset is already underway.
Those expensive FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), which were mainstream media darlings and have had the herculean task of holding up the stock market almost single-handedly for years, are finally starting to roll over. And as the old saying goes, the bigger they are, the harder they fall.
2018 has marked the last gasp of the FAANG era, as elevated price-to-earnings ratios and unjustified valuations have pushed this sector to the breaking point. The once-beloved FAANGs are falling hard and fast, taking the Nasdaq 100 index on a nauseating roller coaster ride:
Complacency and euphoria reigned in 2017, but the pendulum must inevitably swing the other way because volatility always rears its ugly head sooner or later. And it’s the most overvalued stocks – the media-hyped ones that led the markets on the way up – that will lead the way down as greed gives way to fear. In this case, it’s the FAANGs that are teaching investors a hard lesson: the markets giveth and the markets taketh away.
If you’re considering hiding out in cash until the storm passes, be advised that it’s okay to have some dry powder handy to pick up your favorite stocks and other assets when they’re super cheap – but holding too much cash for too long is not a wealth-building strategy, as steadily rising inflation has made the dollar a deteriorating asset class:
Thus, cash positions aren’t as safe as they may seem. Instead, I recommend an asset class with a history going back thousands of years: precious metals, the world’s most reliable and time-tested hedge against market turmoil. Gold and silver are not only lasting stores of value and universally recognized forms of money, but they’re terrific portfolio hedges when the stock market turns sour.
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I’ve been accumulating both gold and silver, as the long-side set-up hasn’t looked this good in years. Gold is on sale now, having come down to the $1,200 area where it’s now starting to bounce off of that key level:
And if you don’t mind a little bit more risk and reward, you might consider adding some silver in with your gold holdings. Silver tends to move in both directions faster than gold, so when silver recovers from a dip, it tends to rise more sharply than gold. Silver is currently trading below $15 per ounce, a bargain price point that we haven’t seen in a while and might never see again:
With the gold-to-silver ratio in the mid-80s – a rare occurrence signifying that silver is cheap compared to gold – there’s a compelling case that silver is due for a mean-reversion rebound of epic proportions. But no matter how you slice it, gold and silver are perfectly positioned for a bounce as other asset classes flash multiple warning signs.
Mind you, all of this comes with a caveat: precious metals, like all other markets, are always capable of going lower – even when the prices are already depressed. That’s a lesson cryptocurrency investors recently learned when Bitcoin fell from $20,000 to the $6,000-to-$7,000 area and then stabilized there for several months, only to drop quickly below $4,000:
This is what can happen in any bear market – even at low prices, and even after a period of apparent stability, the market can take the price another leg down as investors struggle to find a bottom. Although I’m not expecting it, investors need to be prepared for this possibility with their precious metal holdings.
It’s a chance I’m willing to take as we head into a new year with stockholders getting whipsawed and the dollar deteriorating at an alarming rate. As a precious metal bull, I’m looking at gold and silver with optimism and anticipation of what, by all indications, could be our best year ever.
Chief Editor, CrushTheStreet.com
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